NZD/USD drops back below 0.7150 from multi-year highs

NZD/USD has slipped back from fresh multi-year highs set earlier in the session of above the 0.7170 mark and now trades closer to 0.7150. The pair still trades with solid gains of more than 0.6% or over 40 pips on the day and still sits at the top of the G10 performance table.

Strong Q3 GDP data

GDP data released at 21:45GMT on Wednesday showed the economy rebounding at a faster than expected 14.0% QoQ rate in Q3 2020, having contracted at a rate of 11.0% in Q2 as a result of the initial Covid-19 lockdown.

Westpac state that Wednesday’s GDP report “confirmed what we have been saying for many months: successfully eliminating the spread of Covid-19 has allowed the New Zealand economy to rapidly swing back into action once the restrictions were lifted”. The bank notes that the result was “stronger than our forecast and, along with the earlier revisions, puts the level of GDP slightly above its pre-Covid level… an extraordinary result while international travel and tourism remain almost entirely absent”.

While the stronger than forecast data has most certainly given NZD a lift, ANZ are more cautious going forward; “ongoing divergence across industries suggests New Zealand is experiencing a two-speed recovery… Activity in some industries is off the chain, while others are really struggling” notes the bank. “The tug of war between housing-induced domestic demand (and resilient agriculture) versus the lost summer of international tourism suggests this divergence will persist in the near term, with resulting stresses and strains in the labour market due to extreme skills mismatches” concludes the bank.

New Zealand Finance Minister makes hawkish remarks

New Zealand Finance Minister Grant Robertson made remarks during Thursday’s Asia Pacific session that the government feels no great discomfort from the current level of NZD, comments which markets seem to have taken as a nod to recent appreciation and a green light for the rally in NZD/USD to continue. Robertson attributed gains in NZD to the stronger than expected economic recovery.

Moreover, Robertson noted unease regarding current debt to income ratios in the country. These comments might also be helping NZD, here’s why…

There seems to be a growing consensus within the New Zealand government that the RBNZ’s ultra-easy monetary policy stance of recent years is contributing to “unaffordable” housing in the country. Of course, this makes sense as low-interest rates bring down the cost of mortgages, which increases the demand for housing.

A few weeks ago, the New Zealand government floated the idea of including house price inflation in the RBNZ’s overall inflation remit as a means to bring house price growth back under control (note that house prices has skyrocketed since the onset of the pandemic).

If they were forced to also target house price inflation, the RBNZ would likely have to hike interest rates and axe its QE programme immediately, given that house price inflation in recent years has significantly outpaced Consumer Price Inflation. Of course, the RBNZ has responded by saying that it does not think it should do this.

Robertson’s comments on the country’s high debt to income ratio might be a nod to a new line of attack the government might take against the RBNZ, an accusation that loose RBNZ monetary policy has encouraged excessive levels of borrowing.

In other words, the New Zealand government seems increasingly hawkish on monetary policy. Of course, they have the power to legislate tweaks to the RBNZ’s mandate or policy tools. If it does look increasingly as though they will go down this route, this will in the end be an NZD positive.